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Political Dynamics Affecting the Business Climate in Nigeria

Donald L. Heflin, Acting Office Director, West African Affairs
Advisory Committee on International Economic Policy
Washington, DC
July 31, 2007

Assistant Secretary Sullivan, Vice President Gadbaw, and esteemed guests, I am honored to discuss with you today the political dynamics and business climate in one of Africa’s most pivotal countries and one of our most important strategic partners--Nigeria. Both the challenges and the opportunities are enormous.

Overview

A prosperous Nigeria remains vitally important to our security, democracy, trade, and energy needs and objectives. Nigeria is one of our most dependable African allies on a wide array of diplomatic initiatives including Darfur, peacekeeping, counter-terrorism, to HIV/AIDS--where recent data indicates that prevalence rates for AIDS in Nigeria actually may be declining. As an emerging market of 140 million people, Nigeria welcomes U.S. investment and technology. Nigeria now accounts for 11% of U.S. oil imports and is currently our fourth largest exporter of crude oil to the United States. Most Nigerians are positively disposed toward the United States and have a strong affinity for U.S. products. Nigerian businesspeople are eager to form partnerships with U.S. counterparts. Nigeria has a bright future on the world stage, but the notable macro-economic reforms achieved over the past few years must be translated into improvement in living standards for all Nigerians, who comprise about one-fifth of Africa’s population. Nigeria also must become more competitive in attracting foreign investment, and do more to improve road, rail and port infrastructure, power generation, and to remove various barriers to trade.

Yar’Adua Administration

I’d like to start by discussing the biggest new political development in Nigeria, the election of President Yar’Adua. Although it is too early to predict the performance of his administration or his recent cabinet picks, there is no reason to believe Nigeria’s policies of macroeconomic reform and close ties with the United States will diminish. In fact, President Yar’Adua seems to be taking a series of deliberate steps to establish his independence and credibility. Ironically, a flawed electoral process appears to have brought to power a man of integrity. This result is important. The United States shares with Nigerians their disappointment over the conduct of the April 2007 elections, and some critics will no doubt urge us to isolate Nigeria. But the stakes are too great to walk away. In our judgment, the best way to nurture Nigerians’ fragile democracy is for the United States to engage on the very issues at risk: political reform; regional security; and economic opportunity. As our recent Ambassador John Campbell told the Nigerian press, democratic culture has grown in the past three years, and the United States will continue to walk beside Nigeria on its pilgrimage to democracy. We will continue to support the Nigerian government and civil society in their efforts to strengthen and improve electoral law and tribunal system, to promote judicial and legislative independence at the national and state levels, and to fight corruption.

Niger River Delta

Of course, one of the biggest challenges facing President Yar’Adua and the other new political leaders is how to address the unrest in the oil-rich Niger River Delta. The problems there are real and, while they may seem daunting, they can be addressed and resolved. We acknowledge the legitimate aspirations of the people of the Niger Delta and would like to offer development and other expertise to help pursue goals such as controlling piracy, corruption, and other crime. However, a strict “top-down, outside-in” approach to development has not worked in the past, and we don’t have reason to believe it would work better in the future. Solutions to these challenges reside not in Washington, London or Beijing but in the cities and villages of the Delta. The issue at hand is not a lack of resources or talent. It is the commitment and willpower of the federal and various state governments.

However, we must face the fact that forces resistant to change will continue to attempt to hinder progress. Nigeria’s institutional foundations have been hollowed from decades of neglect and corruption that will continue to make the country susceptible to recurring crises in the coming years. The government has not stemmed lawlessness and insecurity, and Nigerians are demoralized from worsening living conditions. We have often said that the greatest obstacles to Nigeria’s advancement are deeply entrenched poverty and unemployment, continued pervasive corruption, ineffective governance, and the need for electoral reform. Decades of unaccountable rule have eroded health and education infrastructure, suppressed democratic institutions, and stifled job creation.

However, we believe that the U.S. private sector, by building partnerships with local communities, non-governmental organizations, and the oil majors can do more to create more jobs, reduce more poverty, and generate more wealth than any public sector initiative can achieve. In this regard, we are urging Nigerian authorities to work with the U.S. private sector to provide opportunities for profitable agricultural livelihoods, technology development, constructive use of currently “flared” natural gas, enhancing refining capacity, cultivating biofuels, promoting environmental remediation and clean drinking water, building greater public access to telecommunications networks and health care, developing information technology and aviation transport, and curbing oil theft. By offering a variety of education, training, and mentoring programs, private enterprise could be the engine that creates a sense of ownership and control for the people of the Delta over their own resources and fate. This is key to lasting peace.

Let me now spend a few minutes highlighting the current situation in the energy, power, infrastructure, and financial sectors.

Energy

The problems in the Delta are inextricably linked to Nigeria's energy picture. Globally Nigeria is a major petroleum producer, with large reserves and growing production. At the beginning of 2006, production capacity was about 2.5 million barrels per day (bpd). Since that time, it has grown to about 3 million bpd and is set to grow further this year. Unfortunately, violence in the Niger River Delta has thrown over 600,000 bpd off-line. Although most new production is off-shore, militants have shown they are able to attack off-shore facilities. Despite Nigeria’s growing capacity, the recurring attacks on oil infrastructure mean that Nigeria's actual production is somewhat erratic and unpredictable. While there is hope that the new administration will bring a new focus and attention to the problems afflicting the Delta, it is unlikely there will be a quick resolution.

Production is limited most significantly by the Government of Nigeria’s ability to finance its own investments in the sector. The majority of Nigerian oil and natural gas projects are funded by joint ventures with the national petroleum company (NNPC) as the major shareholder. (Deepwater offshore projects are funded through production sharing contracts.) As a result, private sector oil companies are limited to investing amounts that the government can match each year. NNPC is exploring other avenues, in addition to direct government funding, to finance its share of projects and increase the pace of new investment.

The lack of qualified technical staff is a constraint. Violence in the Delta has made recruiting expatriate staff increasingly difficult, especially for the oil services companies. We understand that the oil majors estimate that over a thousand positions are unfilled, slowing progress on new projects.

Nigeria also has large reserves of natural gas and has several Liquefied Natural Gas (LNG) projects underway. The first of these has begun shipping gas to the U.S. and shipments are projected to grow rapidly. Europe is looking at Nigerian gas as a supplement or back up to Russian supplies. LNG projects face the same difficulties in attracting qualified staff as oil projects, though natural gas projects have not yet faced the kinds of attacks that oil facilities have.

The long-delayed, World Bank-assisted West African Gas Pipeline, which now will not be commissioned until June 2008, continues to face physical security issues, environmental degradation, and especially securing reliable gas supplies for export, given Nigeria’s looming domestic energy crisis, fueled by price supports.

Despite abundant oil and gas, the Nigerian domestic market is poorly supplied. The country’s four refineries function erratically or not all, forcing Nigeria to import most, if not all, refined products. Supply infrastructure for both petroleum products and natural gas are regularly vandalized, not only affecting supply but also creating serious health and environmental problems.

Power

Nigeria's power infrastructure is in dire straights. Of about 7500 megawatts of installed capacity, Nigeria’s plants produced merely 1500-2300 megawatts last year. Estimated demand is 15-25 times as high as production. It is not surprising that Nigeria leads the world in amount of power produced by private generators. Perhaps the biggest issue has been securing fuel to new plants. There are also a host of regulatory and collection issues that need to be resolved. The lack of power is a major hindrance to better economic and social development in Nigeria.

Infrastructure

Nigeria faces other infrastructure constraints. Road transport is difficult and expensive because of poor conditions. The railway system is moribund. The ports are crowded and not automated. The government interferes with independent civil aviation safety and security oversight. The World Bank has estimated that it is more costly to ship a container within Nigeria than from Europe to Lagos. Real progress has barely begun to address shortfalls in each of these areas.

Telecommunications, however, is an economic success story. Since deregulation, it has been Nigeria's fastest growing sector. Millions of Nigerians previously lacking communication services are now connected by cell phones. The picture remains far from ideal, however. Despite privatization, service provided by the national telephone company has deteriorated. On the cellular side, infrastructure has not always kept pace with growing demand, leading to service problems. Internet connections are widely available, but expensive and unreliable.

Financial Sector

Nigeria's financial sector has undergone a major restructuring, with new capital requirements forcing a consolidation of the banking sector from about 150 or to just 25 banks. The banking sector still deals with only a limited sector of the Nigerian economy—mainly those sectors like oil an gas with international involvement. Insider trading and the concentration of loans in a few sectors and to a few players present significant risk.

Concomitantly, the Government has reduced the external debt burden to low levels, liberalized foreign currency dealing, introduced regular Treasury bill auctions, and is now working to develop a secondary market. Many Nigerian banks are developing foreign partnerships. New regulations have gone into effect for pension funds and insurance companies, and many officials are focused on changing land tenure law to allow real estate to be used as collateral, and thus allow development of both the mortgage market and greater banking activity in the domestic economy in general.

China

Many U.S. businesses are intrigued by the role that China will play in Nigeria’s development and in Nigeria’s commercial ties to America. Nigeria’s ties with China are complex, even if they are strong and cordial. About 20,000 Chinese live and work in Nigeria. China has now eclipsed the United States as Nigeria’s major import partner, with 11% of the trade. (The United States holds over 8%). The average Nigerian resents the use of Chinese laborers in construction projects and perceives the Chinese as harsh employers. Nigeria’s pharmaceutical and textile industries are suffering from what appears to be “dumping” of Chinese pharmaceutical and textiles and from counterfeit goods originating in China. Abductions targeting Chinese in the Delta are a growing concern. On the other hand, China is committed to strengthening ties, investing or offering to loan billions of dollars in oil block, railway and road projects. Nigeria’s infrastructure clearly could benefit from Chinese aid, but the Chinese are discovering that their largest, and most highly touted, proposed infrastructure projects have not even broken ground because of cultural and market misunderstandings, bureaucratic hurdles, and corruption. We encourage Nigeria to pursue all public tenders in a manner that promotes transparency and competition and likewise also encourage China to promote transparency and competition for its own long-term interests throughout Africa. We believe that China’s trade relationship with Nigeria can improve opportunities for economic development and need not be seen as a zero sum competition for U.S. businesses.

U.S. Trade and Investment

Last but not least, I wish to stress the importance of the U.S. – Nigeria trade and investment relationship. Over the past seven years, the United States has provided 53% of Nigeria’s foreign investment: an impressive $11.2 billion. Many people do not realize that Nigeria is our second-largest market for the export of U.S. wheat. Opportunities to expand bilateral trade and investment are encouraging in the sectors of oil and gas equipment, healthcare services and medical equipment, electrical power generating equipment, computer hardware/software, telecommunications equipment, automobile parts and accessories, construction, earth moving equipment, agricultural products and equipment, and franchising. In June 2006, Nigeria expressed interest in a Phytosanitary Standards Agreement and a Bilateral Investment Treaty (BIT), which could help stimulate and “lock in” reforms related to basic protections for investors. We want to work with the Yar’Adua administration and interested U.S. businesses to facilitate improvement to the trade and investment climate. On another positive note, several U.S. carriers will be competing for traffic on new direct flights between the United States and Nigeria by Christmas.

Conclusion

These developments point to the need for robust bilateral engagement, despite the enormous challenges. We are encouraged by President Yar’Adua’s public and private commitments to these types of reform, but recognize that he is operating in a complex political environment. Our goal is to help Nigeria establish itself as a fully democratic, free-market reformer. I am glad to have had this chance to highlight Nigeria’s importance as a strategic partner of the United States, note those areas where we are working to improve the trade and investment climate, and answer your questions. As you consider Nigeria as a place to do business, we look forward to partnering with you for mutual success.

Thank you.



Released on August 1, 2007

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